Pete’s Petroleum, Inc., an SEC registrant with a calendar year-end, is in the business of constructing and operating offs] lore oil platforms. Pete’s Petroleum is required legally to dismantle and remove the platforms at the end of their useful lives, which is estimated to be 10 years. On January 1, 2019, Pete constructed and began operating an offshore oil platform off the coast of Brazil. The total capitalized cost to construct the platform was $3,700,000. In addition, while the future cost of dismantling the oil platform is difficult to estimate, Pete believes there is a 40% chance that the future cost will be $1,425,000, a 40% chance it will be $1,650,000, and a 20% chance that it will cost $2,125,000. The appropriate discount rate is 12%, and Pete uses the straight-line method of
Required:
- 1. Prepare the
journal entries that Pete should record in 2019 related to the oil platform. - 2. Prepare an amortization schedule for the asset retirement obligation.
- 3. Next Level Prepare a table showing the effect of accounting for the asset retirement obligation on assets, liabilities, shareholders’ equity, and net income relative to accounting for the associated costs at the end of the asset’s service life when the expenditure is made.
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Chapter 11 Solutions
Intermediate Accounting: Reporting And Analysis
- 16. Buttercup Company leased a property to Dickies Corporation on January 1, 2020 for a period of 8 years ending December 31, 2027. The first payment happened on January 1, 2020 amounting to P900,000. Buttercup Company had previously purchased the equipment for P4,800,000 from a supplier that Buttercup has been transacting with in the past years. Buttercup has been selling the same property on its ordinary course of business. The present value on January 1, 2020 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000. What amount of unearned interest revenue should be recognized as realized in 2021? a. P490,000 b. P480,000 c. P438,000 d. P391,800arrow_forwardBlue Mining Company purchased land on February 1, 2025, at a cost of $914,200. It estimated that a total of 57,300 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $109,800. It believes it will be able to sell the property afterwards for $122,000. It incurred developmental costs of $244,000 before it was able to do any mining. In 2025, resources removed totaled 28,650 tons. The company sold 21,010 tons. Compute the following information for 2025. a. b. C. Per unit mineral cost Total material cost of December 31, 2025, inventory Total material cost in cost of goods sold at December 31, 2025 $ tA $ /tonarrow_forward. Sunny Inc. had the following transactions related to intangibles during the year: • On January 1, 2022, Sunny signed an agreement to operate as a franchisee of Dairy King, Inc. for an initial franchise fee of $150,000. The agreement provides that the fee is not refundable. Sunny estimates the useful life of the franchise to be 15 years. • A trade name was purchased from Cloudy Company for $90,000 on January 1, 2020. Expenditures for successful litigation in defense of the trade name totaling $18,000 were paid on January 1, 2022. Sunny estimates that the trade name will have an indefinite life. After all necessary adjusting entries have been made, what is the total book value of the intangible assets on the December 31, 2022, balance sheet? A) $108,000 B) $140,000 C) $248,000 D) $258,000 E) None of the abovearrow_forward
- On January 1, 2024, Ghosh Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2027, at which time possession of the leased asset will revert back to Ghosh. The equipment cost Ghosh $957,000 and has an expected useful life of five years. Ghosh expects the residual value at December 31, 2027, will be $301, 000. Negotiations led to the lessee guaranteeing a $341, 000 residual value. Equal payments under the finance/sales - type lease are $201,000 and are due on December 31 of each year with the first payment being made on December 31, 2024. Karrier is aware that Ghosh used a 4% interest rate when calculating lease payments.arrow_forwardVaughn Mining Company purchased land on February 1, 2025, at a cost of $1,031,100. It estimated that a total of 54,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $99,900. It believes it will be able to sell the property afterwards for $111,000. It incurred developmental costs of $222,000 before it was able to do any mining. In 2025, resources removed totaled 27,000 tons. The company sold 19,800 tons. Compute the following information for 2025. a. Per unit mineral cost $enter a dollar amount per ton /ton b. Total material cost of December 31, 2025, inventory $enter a dollar amount c. Total material cost in cost of goods sold at December 31, 2025 $enter a dollar amountarrow_forwardPharoah Corp., reporting under ASPE, has provided the following information regarding its intangible assets: 1. A patent was purchased from Marvin Inc. for $1.1 million on January 1, 2019. Pharoah estimated the patent’s remaining useful life to be 10 years. The patent was carried in Marvin’s accounting records at a carrying amount of $1,400,000 when Marvin sold it to Pharoah. On January 1, 2020, because of recent events in the field, Pharoah estimates that the remaining life of this patent is only five years from January 1, 2020. 2. During 2020, a franchise was purchased from Burr Ltd. for $304,000. As part of the deal, Burr must also be paid 6% of revenue from the franchise operations. Revenue from the franchise for 2020 was $1.2 million. Pharoah estimates the franchise’s useful life to be 10 years and takes a full year’s amortization in the year of purchase. 3. Pharoah incurred the following research costs in 2020: Materials and equipment $81,200 Personnel…arrow_forward
- Pina Colada Corporation purchased a patent from MaFee Corp. on January 1, 2023, for $85,950. The patent had a remaining legal life of 15 years. In January 2025, Pina Colada spends $27,920 successfully defending a patent suit. In addition, Pina Colada now feels the patent will be useful only for another seven years. Prepare the journal entries to record the 2025 expenditure and amortization for the year. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter O for the amounts. Round answers to O decimal places, e.g. 5,275. List all debit entries before credit entries.)arrow_forwardPresented below is selected information for Alatorre Company. 1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020? 2. Alatorre bought a franchise from Alexander Co. on January 1, 2019, for $400,000. The carrying amount of the franchise on Alexander's books on January 1, 2020, was $400,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2021, it is unlikely that the franchise will be retained beyond 2028. What amount should be amortized for the year ended December 31, 2020? 3. On January 1, 2020, Alatorre incurred…arrow_forwardRuby Ltd. purchased a patent for $450,000 on September 1, 2020. It had a useful life of 10 years. On January 1, 2022, Ruby spent $220,000 to successfully defend the patent in a lawsuit. Ruby feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2022? $arrow_forward
- Buttercup Company leased a property to Dickies Corporation on January 1, 2020 for a period of 8 years ending December 31, 2027. The first payment happened on January 1, 2020 amounting to P900,000. Buttercup Company had previously purchased the equipment for P4,800,000 from a supplier that Buttercup has been transacting with in the past years. Buttercup has been selling the same property on its ordinary course of business. The present value on January 1, 2020 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000. What amount of unearned interest revenue should be recognized as realized in 2021?arrow_forwardHeadland Mining Company purchased land on February 1, 2020, at a cost of $939,500. It estimated that a total of 51,600 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $92,700. It believes it will be able to sell the property afterwards for $103,000. It incurred developmental costs of $206,000 before it was able to do any mining. In 2020, resources removed totaled 25,800 tons. The company sold 18,920 tons. Compute the following information for 2020. (a) Per unit mineral cost (b) Total material cost of December 31, 2020, inventory $4 (c) Total material cost in cost of goods sold at December 31, 2020 24arrow_forwardNatalie Company purchased a machine for P6,600,000 on January 1, 2021 and received a government grant of P600,000 towards the capital cost. The policy is to treat the grant as reduction in the cost of asset. The machine is to be depreciated on a straight light basis over 10 years with a residual value of P500,000. On January 1, 2023, the grant became fully repayable because of noncompliance with conditions. What is the depreciation for 2021? What is the depreciation for 2023?arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning